The smart money: driving shareholder value through better capital allocation

Abstract

As shareholder activism has grown both in its scope and influence, management teams are under increasing pressure to justify their decisions around the allocation of capital – whether it be through dividends, share buybacks, an expansion project, M&A or a greenfield project. However, for the oil and gas sector, much like the mining sector, it has been historically difficult to demonstrate continued excellence in capital decision making. In the past, capital intensive, long-dated projects (multi-billion dollar LNG developments) and large-scale M&A saw returns and pay-offs that were both distant and uncertain. Now, with so much investor scrutiny and focus on short term performance, demonstrated capital discipline is paramount – oil and gas leaders must think very carefully about where they allocate capital. Although they present their own challenges, capital allocation decisions, unlike commodity prices or the macroeconomic climate, are within the control of companies, and if a model can be developed to deliver long-term value, these decisions will position shareholders and their management teams well for the future. This paper will chart the performance of a sample of oil and gas companies against their decisions around capital allocation and cost-reduction. The paper will demonstrate to oil and gas leaders the importance of aligning their organisational strategies and balance sheet investments to create future value for shareholders.